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Carbon Trading Initiative a Success, Study Says

By Matthew L. Wald November 15, 2011 7:29 amNovember 15, 2011 7:29 am

Juan Arredondo for The New York TimesA lineman installing solar panels in the spring in Totowa, N.J.

The Regional Greenhouse Gas Initiative, a 10-state program that has been testing a carbon dioxide cap-and-trade system, may be in trouble, with New Jersey planning to drop out and other states considering doing the same.

But a new study says the program has saved money for consumers, stimulated job growth and kept money in local economies in the states that signed up.

Power plant owners paid in $912 million over the period studied, from mid-2008 through September. Some of it was spent on projects like improving energy efficiency, some went to unrelated environmental purposes like restoring wetlands and some simply went into general use by the states.

The 10 states within the program, known as RGGI (pronounced Reggie) are the six New England states, New York, New Jersey, Maryland and Delaware.

The study, paid for by four nonprofit foundations and carried out by the Analysis Group, a Boston-based consulting firm, found that the regional economy would gain more than $1.6 billion from actions taken under the initiative in the period studied. The figure represents the value of future savings as the energy efficiency benefits are realized. Three-quarters of it would come from savings in electricity, natural gas and heating oil bills.

Companies that make electricity from coal and natural gas raised their asking price for power. That pushed up the market price for electricity, so companies that made electricity from wind, sun and uranium also received a higher price for their output in auctions in the power markets. But the latter companies did not see any increase in expenses, so their profits rose, the study said.
The study also cited a benefit that would accrue to a regional pilot effort but not to a nationwide program: fuel use dropped, and since none of the states involved produces much fuel, the money stayed there.

Expenses were higher for New Jersey, Maryland and Delaware because their electric system uses more coal.

But the period covered was one involving radical changes in the electricity market, some of which made the effects of the greenhouse gas imitative harder to discern, according to some experts. The price of natural gas collapsed, allowing gas to take market share from coal. That was a trend that imposing costs on carbon dioxide emissions was supposed to encourage since a coal plant emits about twice as much carbon dioxide as a natural gas plant.

The greenhouse gas initiative, though, turned out to be piggybacking on a larger economic force, the relative price of fuels.

The carbon charges helped make electricity slightly more expensive than it would otherwise have been, about 0.7 percent higher, a factor that was intended to drive down demand and encourage conservation. But the price of electricity was falling over the period anyway, and demand was way down because of the recession.

The national demand for electricity declined in 2008 and 2009, a very rare occurrence, and while it picked up a bit in 2010, it is still not back to 2007 levels.

Popular sentiment now seems to be running against carbon controls.
Gov. Chris Christie of New Jersey announced in May that he would pull his state out of the 10-state compact by the end of this year. Carbon allowances were sold every three months, he said, but the allowances “were never expensive enough to change behavior as they were intended to.”

When the program was envisioned, the economy was strong and experts expected that the right to emit a ton of carbon dioxide would sell for $20 to $30, but it never got above the low single-digits.

One of the report’s authors, Susan F. Tierney, a former utility regulator in Massachusetts and onetime assistant secretary for policy at the federal Energy Department, said that while changes in the energy economy had made the effects of the initiative less obvious, the program yielded benefits and would have done so regardless of the state of the energy market.

The benefit was from improving energy efficiency, which states used at least some of the money to accomplish, she said. “Rational people leave money on the table with energy efficiency,” Dr. Tierney said.

When states run an efficiency programs, they can overcome a variety of economic barriers — like a landlord who picks a cheap but inefficient refrigerator that runs on electricity that the tenant pays for — in a way that pure economic incentive cannot, she said. She called it “a cost-effective societal use of money.”

The study found, however, that some of the money went to purposes unrelated to energy.

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How are climate change, scarcer resources, population growth and other challenges reshaping society? From science to business to politics to living, our reporters track the high-stakes pursuit of a greener globe in a dialogue with experts and readers.